Chapter 11 bankruptcy might be the best option for your struggling business. Unlike a Chapter 7 bankruptcy that wipes away debts, Chapter 11 bankruptcy involves reorganizing and restructuring your business.
Part of this process involves negotiating with creditors to pay your outstanding debts. Business debts are paid in a certain order.
most business owners, you are likely used to getting to choose the order that your debts are paid. This changes once you are in Chapter 11 bankruptcy.
Secured creditors
Secured creditors are paid first. These are creditors whose debt is secured by assets that your business controls.
If you have more than one secured creditor, the order in which all secured creditors are paid must also be determined.
There are no set rules for choosing the order of secured creditor payments, but the bankruptcy plan generally considers how important the assets securing the loans are to your business.
Additionally, some assets could have multiple liens on them from different creditors. The first lien typically has priority over the second, and so on.
Unsecured creditors
Unsecured creditors are paid next. These include your vendors, suppliers and other creditors whose debts are not secured by assets.
As with secured creditors, the plan includes an order for the payment of unsecured creditors. Unsecured creditors may be classified as preferred and non-preferred, with preferred creditors getting paid first. Some examples of preferred creditors include employees or tax bureaus.
There is sometimes not enough money to pay all creditors. This means that unsecured creditors may not always receive everything they are owed.
Stockholders
Stockholders are typically the last people to get paid in Chapter 11 bankruptcy. Most stockholders are aware of this, since making an investment in a business usually comes with the understanding that the investment may not necessarily be recouped.
The order of payment is one of several topics to consider before filing Chapter 11. Deciding to file for bankruptcy is not a decision that should be made lightly.